You will be able to compare your net return with a managed fund or robo-advisor on the same basis.
Marcus's sister keeps her savings in a robo-advisor and likes to tease him about all his spreadsheets. When she showed him her app, it said her portfolio had returned about 4.6% a year over five years. His own figure was about 5.6%. He was tempted to declare victory. Then he remembered module 1, and the four questions it asks before any two returns can sit side by side.
This lesson compares a self-run portfolio with a managed alternative on the same basis, money costs and hours included. Marcus's own returns are the made-up figures from lesson 1.8, Build the returns tab of your investment workbook. The managed alternative's figures are made up too.
A fair comparison uses the same measure, the same costs, the same currency and the same period. That means time-weighted returns for both, because you want to compare the investment choices and not the timing of deposits, as lesson 1.4, Time-weighted vs money-weighted returns on your own account, explained. Both should be net of every cost, in SGD, over exactly the same dates.
The managed alternative needs to hold similar risk. For Marcus, that's a fund or robo portfolio at roughly 80% shares and 20% bonds and cash, spread across the world, the same shape as his allocation. A 100% equity fund would beat him in good years and lose to him in bad ones for reasons that have nothing to do with skill, the mistake lesson 1.6, Choose a benchmark that matches what you actually hold, warned about.
Its costs must be complete: the advisory or platform fee plus the expense ratios of the funds inside it, and any sales charge. Unit trusts, robo-advisors and managed money compared lists them all, in lesson 4.3, What a robo-advisor really costs, and for unit trusts in lesson 2.4, List every charge on one fund. A published net return usually includes the fund expenses and sometimes the advisory fee. Check which, and deduct whatever it leaves out.
Marcus picked a made-up robo portfolio at his risk level, whose published returns in SGD, after all its fees, were 8.8%, minus 14.2%, 14.6%, 6.8% and 9.8% over his five years. Chained together, that's a time-weighted return of about 4.64% a year.
His own time-weighted return over the same years was about 5.58%, after all his money costs, because it came from actual account values. That's about 0.94 points a year ahead. In money, his deposits of S$164,000 ended at about S$202,185. The same deposits on the same dates in the managed portfolio would have ended at about S$197,445. So before counting his time, running his own money left him about S$4,740 better off over five years.
Now add the hours. Lesson 12.5, Price your hours: what your research time costs, put his time at about S$5,616 a year at S$36 an hour. He probably spent somewhat less in his early years, but even at half that rate, five years of hours cost more than S$14,000. At the full rate, about S$28,000. Either way, the S$4,740 he gained is smaller than the time it took.
He added a third line, because the managed portfolio isn't the only alternative. A plain version of his own benchmark, built from index funds at a made-up total cost of 0.25% a year, would have returned about 5.17% a year, and his deposits would have ended at about S$201,670, only S$515 less than he actually had. It would have needed about 12 hours a year instead of about 156.
Five years sounds like a long record. For telling skill from luck, it's short.
Here's a rough way to see it. Suppose, with a made-up figure, that Marcus's yearly returns differ from the managed portfolio's by about 3 points in a typical year, sometimes ahead and sometimes behind. An average lead of 0.94 points over five years is then well within what chance alone could produce. On the usual statistical rule of thumb, to be fairly confident that a lead that size wasn't luck, he'd need roughly 40 years of data. Most investors never get a record long enough to prove skill, which is exactly why the comparison has to be repeated every year rather than settled once.
The same caution works in the other direction. One bad year doesn't prove a self-run portfolio is a mistake, and one good year doesn't prove it's working. Use rolling three or five-year windows, as lesson 1.5, Annualise, compare periods and spot cherry-picked start dates, taught, and look at the trend.
He wrote three sentences under his comparison. "Over five years my portfolio beat a managed alternative of similar risk by about 0.94 points a year after money costs, about S$4,740 in total. Counting my hours at S$36, it trailed by somewhere between S$9,000 and S$23,000. A plain index version of my own benchmark would have matched my result to within S$515 in less than a tenth of the time."
That doesn't tell him what to do yet. It tells him what his choices have cost, measured honestly, and lesson 12.8, Assemble your investment file and decide your next step, is where he decides.
For the activity, choose a managed fund or robo portfolio at a risk level close to your own allocation, and collect its net returns in SGD for the same years your returns tab covers.
Pick a managed alternative with similar risk and compare its net SGD return with yours over the same period.
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